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The Partnership charter

Millions of people co-own closely held companies, family businesses, and business partnerships, but establishing them and keeping them together is never easy. Here, finally, is the guide they have been waiting for.... Read More

Ingredients for a Successful Partnership

Morry Stein and his close friend Ben Appelbaum were not only well-regarded camping professionals, but they were business partners in the early 1970s. Ben, owner of Ivy League Day Camp, and Morry, owner of Camp Echo Lake, purchased a number of day camps and day schools together, forming KIDS Corporation. Together, they had some early successes, but before too long they found themselves in a situation they had not anticipated — dangerously strapped for cash. While Morry was consumed with worry, Ben went away on vacation. Morry, a worrier by nature, could not believe that Ben had chosen this critical time to enjoy a vacation. Ben, an eternal optimist, couldn’t understand how Morry could be so concerned about a situation that they clearly would rectify.

Not long after Ben returned from vacation, he and Morry decided to dissolve their partnership. Though they remained the closest of friends for the rest of their lives and, in fact, participated on their own in many other successful partnership ventures with new partners, they were not able, at that time, to be effective partners with each other.

Taking Care When Starting Up

It’s fascinating to wonder if Ben and Morry might have avoided their crisis and dissolution had they approached their partnership differently. The seeds of conflicts are almost always sown when partners are starting up or when there is some type of partner transition. These are two critical times for co-owners. Importantly, it’s when they have the best opportunity for ensuring their long-term success.

The trouble is that very few business people understand the steps they can take to strengthen their partnerships. What people can do isn’t rocket science, but it isn’t taught in schools. Without knowing what precautionary steps to take, people tend to dive in much too fast. Part of the reason why partnerships can turn difficult is that people are not aware of the many steps they can take to reduce the risks.

Going into business with a friend, as Morry and Ben did, provides some comfort and protection because there is a history. Unfortunately, knowing people socially is often not sufficient and sometimes downright misleading. Many people are quite different in business and social environments. When friends do go into business together, they need to be especially careful not to skip steps. They need to appreciate the importance of operating in a business-like way when at work and that includes writing down their agreements.

Broadly speaking, there are three areas that are critical for potential partners to attend to–the relationships among the partners, the business arrangement, and the future of the partnership. (We use the term partnership, not in the strict legal sense but to describe any type of co-ownership arrangement.) People entering partnerships need to know with whom they are getting involved, exactly what the deal is, and where they are going down the road.

The Relationships

When you think about how much is riding on the quality of the relationships among owners, it is truly amazing that more attention isn’t given to them. Potential and existing partners will strengthen their relationships most effectively by examining their personal values, their personal styles, and the issue of fairness.

People who contemplate joining forces need to realistically determine if their personal values are similar enough. Sharing similar values is important because they form the basis for trust in relationships and because they form the underpinnings of partners’ decisions. They play an important role in decisions such as taking on debt, paying taxes, managing employees, the rate of enrollment growth, and even the ultimate size of the camp.

Consider two partners debating the matter of a much-needed capital improvement at their camp. One partner wants to assume a debt to get the project done immediately while the other wants to stagger the project so it can be funded out of cash flow. The partners’ disparate appetites for risk are very likely grounded in different values. When partners’ values are different, sooner or later they are likely to butt heads.

Personality conflicts are a frequent cause of stress among partners. By employing short but sophisticated personal style tests, psychologists can help potential partners determine if there are any red flags that suggest incompatibility. They can also help existing partners construct agreements about how to work together more effectively given the similarities and differences in their styles.

Another frequent problem in partner relationships is the matter of fairness. The problem develops when someone gets the feeling that he or she is putting more into the business than the partner, or that one partner “isn’t carrying his or her weight.” In a nutshell, to ward off this problem, there needs to be a thorough discussion about what each partner is going to put into the business and what each wants to get out of it. And because circumstances in the work and personal lives of partners continually change, these discussions should be revisited periodically so that resentments do not have a chance to build up.

The Business Arrangement

The business aspects of partnerships are the ones that are typically dealt with the most by partners-to-be, but even these issues are rarely dealt with thoroughly enough. It is sometimes shocking how people–even seasoned business people–can enter into business partnerships without clearing up the ambiguity around matters like ownership percentages, roles and responsibilities of each partner, evaluating performance, hiring family members, compensation, dividend policy, information sharing, and the way decisions will be made.

Hidden in these seemingly straightforward business issues are lurking sensitive issues about money and power that come back to haunt partners years later if left ambiguous. People say, “We’ll get to that later,” but “later” keeps getting pushed back further and further.

Camp owners generally know the nature of the business they are in but sometimes questions arise over specific goals and how to best achieve them. These issues regarding strategic direction can be near and dear to camp owners’ hearts and therefore stir up a lot of emotion. Clarity and agreement on the goals of owners, where the camp is going, and how it will get there are extremely important to keep conflict in check.

The Future

The third and final set of issues that potential partners need to examine and negotiate has to do with the future. Because new partners are so eager to jump in and have so many urgent matters they must address, they usually are not looking far down the road. But planning ahead–not just for the business but for the partnership itself–can have huge payoffs over time.

People involved in or contemplating partnerships should consider four critical areas for the partnership’s future: expectations, creating guidelines to deal with the unexpected, dealing with differences, and planning for the end.

Expectations

Unmet expectations are a common complaint among partners. In fact, a poll of business people by Inc. magazine and Xerox a few years ago revealed that unmet expectations was number two in a list of reasons to avoid having partners. Interpersonal conflicts was number one.

One camp was in the process of making the transition from the second to the third generation, and it hit very rough sailing when the son and his wife began taking over the helm. After a period of almost a year, when there were more flair-ups than talking going on, the mother, father, son, and daughter-in-law sat down with an outside person and got to the bottom of the matter. Both parents had a clear expectation that their son was going to continue to run the camp the way they and the father’s parents had always run it. Perhaps the son should have been aware of their expectations of him and that this was the source of the friction, but he was not. Only after getting it out on the table were they able to negotiate a resolution.

Even before such disappointments arise, we suggest a series of exercises that uncover people’s expectations. Often people do not recognize the expectations they carry around for others. They need a way to become clear about what expectations they have of others and themselves, and have a way to discuss expectations that are not being met.

Creating guidelines

Creating guidelines for the unexpected is an excellent vehicle for learning more about a potential partner and for building confidence that the partner team is ready to deal with challenges. For example, who is responsible if the venture requires additional funding? What happens if one partner’s interest in the camp dwindles dramatically? There are many circumstances–hypothetical scenarios–that most partners never imagine, but the last thing you want to be doing during a crisis or tragedy is figuring out how to negotiate your way out of these situations. It is far better to resolve them prior to becoming partners.

Dealing with differences

Differences and conflicts are an inevitable part of most every business partnership. By talking ahead of time about the steps partners will take to resolve conflicts, including the use of negotiation, mediation, and if necessary, arbitration, partners effectively inoculate themselves against the harmful effects of conflicts.

Planning for the end

Finally, potential co-owners need to closely examine all of the various ways they can foresee their partnership ending. What’s the best possible ending? What other endings are less desirous but possible? What can the partners agree on about where they want to end up? Again, the discussion itself has the potential to enlighten and strengthen everyone involved.

A Partner Charter

The relationship. The business. The future. There is a lot to deal with and not everyone makes it through the process–nor should they. Not everyone who talks about being partners is going to make a good partner.

Some siblings who contemplated becoming full partners and tried tackling all of these issues came to the conclusion that becoming true business partners was beyond them. They then came up with alternative paths. Usually some stayed in the business and some left. Going through the process was like a road test. When siblings struggling down the partner path fail to sit down and try to negotiate the tough issues, they often gradually slip into being partners with disastrous results — they never really figure out where they are going.

Potential partners must sit down and hammer out all of the issues related to their partnership. Because the challenge of addressing all of the issues is a daunting one, it is sometimes helpful to have outside assistance, such as a business mediator, who can facilitate the process. The mediator works for all of the potential partners and is free to meet with the parties both together and separately in order to facilitate the process. The mediator will sometimes meet with spouses as well. The mediator has expertise in fostering open communication and greater collaboration among complex groups and has the twin goals of helping the parties set up the arrangement to work for each individual and have it work for the group as a whole. The end product of this process is what we call a Partner Charter document that captures the intentions of the partners as it relates to the three areas noted earlier — the relationship, the business, and the future. Because it is comprehensive in scope and specific in detail, it can eliminate the ambiguities that exist in most partnerships. If potential partners go through this process on their own, it is nonetheless important to document, even informally, the issues they have addressed and to which they have agreed.

Know How To Use Attorneys

Once potential partners have completed a Partner Charter, or their own version of it, they are ready to have an attorney (usually an attorney representing the corporation) draw up legal documents for the partnership or corporation. The Partner Charter does not take the place of the legal documents; rather, the legal documents establish the existence of the partnership or corporation as a legal entity and specify the legal rights and obligations of the partners. Many people give their attorneys the Partnership Charter because it contains all of their intentions and agreements about how they want to own and run their company together.

In most cases, it also may be advisable for each partner to have his or her own attorney review the legal documents to ensure they are in the person’s best interests. In doing so, however, it is important to keep in mind that the long-term success of any partnership depends on the partners wanting each other to succeed and get as much as possible out of the partnership. In contrast, attorneys are hired to represent only his or her client and zealously advocate for that client’s interests.

There have been times when individual attorneys enter into partner start-up situations before the partners-to-be have figured out exactly what their arrangement is going to be. When the attorneys begin advocating for their respective client’s interests, one person or another begins to experience the negotiations as adversarial, i.e., it feels like the “other side” is trying to get an upper hand on an issue. Rather than seeing this as your potential partner trying to put one over on you, it’s best to see it as his or her attorney doing his job, which is to protect his client. Remember that a good attorney will find a way to resolve outstanding issues and get a partnership consummated.

Ongoing Successful Partnerships

Like a well-run camp, partnerships have a greater chance of success when they are set up properly at the very beginning. The “deal” among the partners should be crystal clear–free of all ambiguity. The experience of talking, exploring sensitive issues, negotiating openly and honestly, and creating a shared record of agreements helps to build a bond among the partners. It gives them greater confidence in their ability to handle situations side-by-side. A key to any successful partnership is the willingness and ability to communicate honestly with your partner. Demonstrating this ability when starting up is important. Then it is necessary to periodically check to see how things change, as they inevitably will. Changes in the lives of partners necessitate revisions of the charter and the working relationships. By starting out strong, partners have the best chance of riding out whatever stormy seas come their way.

Tony Stein is an owner/director of Camp Echo Lake in Warrensburg, New York, and David Gage is the managing director of BMC Associates in Arlington, Virginia.